iSLEEP – Accounting Problem

Large Mart_Financial Accounting

Large Mart has previously attempted to develop a “study pillow” which would have allowed students to upload study material into their brain whilst sleeping. However, Large Mart has recently discovered that an American company called Bpple already holds a patent forthis type of device. As a result, Large Mart has given up on its development attempts and decided to sell the Bpple product,which is called iSLEEP. ln order to sell the iSLEEP, Large Mart has rented a second store in Armidale. Large Mart signs a two year renting contract on 1st May 201x. The rentforthe store will be $5,000 per month and the renting contract requires Large Mart to prepay 18 month of rent through a banktransfer on the day the renting contract is signed. As soon as the renting contract for the new store is signed, Large Mart employs two UNE students (Chuck and Morgan) to manage a iSLEEP fan-site on Facebook. Chuck and Morgan are each employed for 2 hours every day ofthe week (7 days a week). Chuck and Morgan start theirjobs on 1st May 201x and will be paid $30 per hour. Chuck and Morgan will receive their first pay on the 15th June 201 x.

The furniture in the new store is designed and manufactured in Hong Kong. An important part of the store design is a big bed on which customers can lie to test the iSLEEP before purchasing the product. The bed is delivered on 1st June 201x. On that day, Larq1e Mart also receives an invoice of $40,000 from the Hong Kong designer/manufacturer ofthe bed. When the bed was produced in Hong Kong,t e director ofthe Large Mart sales department visited the design/manufacturing team to approve the final design ofthe bed before the start ofthe manufacturing process. The director decided to visit the design/manufacturing team because he was traveling to Beijing and his flight from Sydneyto Beijing stopped in Hong Kong. This allowed the directorto visit the design/manufacturing team without having to make a separate trip. lfthe directorwould not have travelled to Beijing, he would have approved the final design via email without a visit. The cost ofthe director’s trip to Beijing was $10,000, and the stop in Hong Kong to visitthe design/manufacturing team created $500 additional costs. All costs ofthe businesstrip will be paid on 3oth August 201x.

After the new store is completed, Large Mart orders 40 iSLEEPs from Bpple for a price of $600 per iSLEEP, and these iSLEEPs arrive on 1 st June 201 x, and are paid via bank transfer 10 days later.

  • On 3rd June 201x, UNE purchases 10 iSLEEPs forthe library for a price of $2,000 per i_SLEEP on credit. UNE then paysthe iSLEEPs on 1oth June 201x, after deducting an early payment discount of5%from the invoice.
  • On 5th June 201x, Large Mart purchases another60 iSLEEPs from Bpple for a special price of $550. Normally the iSLEEP would cost $800, but Large Mart was able to receive a volume discount of $50 for each iSLEEP. The iSLEEPs arrive on the same day and Large Mart pays this new delivery of iSLEEPs on the next day after deducting an early payment discount of 10%.
  • On 8th June 201x, Large Mart discoversthat2 ofthe iSLEEPsthat were purchased on 5th June 201x are damaged. Large Mart returns both iSLEEPsto Bpple and Bpple returns the moneythatwas spent on both iSLEEPsto the Large Mart bank account on the same ay.
  • On 12th June 201 x, Large Mart sells 10 iSLEEPs to Wright College for $1 ,800 per iSLEEP. Wright College pays via banktransfer on the same day WITHOUT deducting any early payment discounts.
  • On 1 st July 201 x, Large Mart leases a company car forthe service department ofthe new store (called the “Nerd Herd”). The duration ofthe lease is5 years, and the car has an expected useful life of8 years. The lease contract requires Large Mart to pg?! $2,000 at the time the lease is signed. This payment is made via a bank transfer. Afurther $8 .000 must be paid (also via bank tran er) on 3oth June of each year during the lease period. The lease contract statesthat Large Mart can cancel the lease at any time during the lease period after paying a penalty of $100. If Large Mart does not cancel the lease, Large Martwill return the car to the lessor at the end of the lease period. The interest rate in the lease is 12%. Large Mart decided to enter into the lease agreement instead of purchasing the car because the purchase price would have been $47,000 and Large Mart did not have sufficient cash resourcesto make such a purchase atthat time.

Please answer the following questions about the scenario outlined above:

  1.  Provide all journal entriesthat are necessary in the books of Large Martto account for the renting contract,the prepayment of rent on 1st May 201 x,the rent expense for the month of May 201x (as well as any changesto the amount of prepaid rent) AND explain your journal entries (2.5 marks).
  2. Provide all journal entriesthat are necessary in the books of Large Mart to account forthe wagesthat Chuck and Morgan have accrued between 1 st May 201x and 15 June 201x, as well asthe payment of wages to Chuck and Morgan on 15 June 201xAND explain yourjournal entries
  3. Explain whether or not the expenditures associated with the director’s visit to the design/manufacturing team in Hong Kong are part ofthe cost ofthe bed (0.5 marks) and provide all journal entriesthat are necessary in the books of Large Mart to accokL)int forthe purchase and delivery ofthe bed, assuming that all costs associated with the bed will be paid at a later date (1.0 mar
  4. Provide all journal entriesthat are necessary in the books of Large Mart to account for all inventory purchase and sales transactions (including the payment and receidat of funds) ofthe new store, assuming that Large Mart uses a perpetual inventory system and the weighted average costflow assumption (4. marks).
  5. Calculate the total Cost of Goods Sold (COGS) forthe financial year ended 30 June 201x (1.0 mark),the value of all iSLEEPs that remain in the inventory account atthe end ofthe year (the 30 June 201x) (1.0 mark), and the total amount of revenue that Large Mark collected through the sale ofthe iSLEEP during the year ended 30 June 201x (0.5 marks) AND outline all necessary calculations.
  6. Determine whetherthe lease ofthe company car is an operating lease or finance lease and provide a detailed explanation for your decision (2.5 marks).
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